ECONOMIC EXPANSION INCENTIVES (RELIEF FROM INCOME TAX) (AMENDMENT NO. 2) BILL

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ECONOMIC EXPANSION INCENTIVES (RELIEF FROM INCOME TAX) (AMENDMENT NO. 2) BILL: Order for SecondReading read.

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2.22 pm

The Senior Minister of State for Trade and Industry (Dr Vivian Balakrishnan): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

This Bill will amend the Economic Expansion Incentives (Relief from Income Tax) Act, or the EEI Act in short. It will put into effect two tax changes which were announced in the 2004 Budget Statement. It will also make other technical amendments to the Act.

I will now describe each of the proposed amendments in turn.

Enterprise Investment Incentive

The Enterprise Investment Incentive or EII in short, was announced in the 2004 Budget Statement. The EII essentially expands the scope of the previous Technopreneur Investment Incentive (or TII in short) to now include all forms of start-ups.

The TII was first introduced in 1999 to promote private equity investments in technopreneurial start-ups at the seed stage. To encourage entrepreneurship in general, the TII, with effect from the announcement on Budget Day, has now been expanded to include start-ups from all sectors and hence, we have renamed it theEII. The eligible investors in start-ups awarded the EII will enjoy tax deductions, against their taxable income, for losses incurred by the investors upon sale of shares in or liquidation of such start-ups which occur during the qualifying period. All prevailing conditions applicable to eligible investors in start-ups who were awarded the TII will similarly apply to eligible investors in start-ups awarded the EII.

Clauses 12, 13 and 15 of the Bill amend Part XIIIC of the EEI Act

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(comprising sections 97S to 97Z) to give legislative effect to the EII.

Pioneer Incentive

Let me move on to the Pioneer Incentive. The maximum tax relief period under the Pioneer Incentive will now beextended from 10 years to 15 years. With increasing competition from both developed and developing countries for investments from multi-national companies (MNCs), we need to enhance the tax incentives offered to MNCs in order to encourage them tomake large investments in Singapore. To this end, the maximum duration for the Pioneer Incentive has been extended from 10 to 15 years with effect from Budget Day 2004. This applies to both pioneer industries and pioneer service companies and is in line with our economic strategy of promoting both manufacturing and services as the twin engines of growth.This change is reflected in clauses 4 and 6 of the Bill.

Pioneer industries

The Bill also provides for an amendment to section 4(2) of the Act to remove the mandatory requirements to invite the public to object to the proposed pioneer industry or products, and for the Minister to declare via an order the industries and products that have been granted pioneer status. The amendment is to allow the Government greater flexibility in customising incentives awarded to strategic companies, and hence protect our national competitiveness.Clause 3 relates to this change.

Capital and writing down allowances

Currently, section 10(3) of the Act provides for the deduction of capital allowances on fixed assets to be deferred until the expiry of the pioneer period. The

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Bill amends the section to provide for similar treatment for writing down allowances in respect of capital expenditure incurred in acquiring Intellectual Property Rights. This is in line with the Government's efforts to develop Singapore into an Intellectual Property Hub.

In addition, one of the existing conditions for allowing deferment of deduction of capital allowances is that more than 50% of the paid-up capital of the pioneer enterprise must be held by persons permanently resident in Singapore. However, as this preferential tax treatment is increasingly a powerful tool to attract foreign investments, it should also be made available to foreign companies on a case-by-case basis. The amendment to section 10(3)(a) is therefore to allow the Minister the flexibility to specify the minimum percentage of paid-up capital to be held by persons permanently resident in Singapore.These changes are reflected in clause 5 of the Bill.

Enhancement of Development and Expansion Incentive

Sir, currently, the Minister is empowered under section 19K(2) to grant upfront, the Development and Expansion Incentive, or DEI for short, fora tax relief period of not more than 10 years. Further extensions may be considered only towards the end of the first incentive period. The Bill seeks to give the Minister the flexibility to grant upfront extensions of the incentive period to companies, subject to the existing maximum incentive period of 20 years. The intention is to provide investors more certainty of a long-term tax incentive in Singapore and put us on par with other competing locations.Clause 8 relates to this change.

Consequential amendments

Finally, as a result of the various changes to the EEI Act, consequential

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amendments will have to be made tosections 3, 66(1) and 70(2)of the Act as well as changes to section 37C(19) of the Income Tax Act. These amendments provide for the following:

(a)a change in the definition of terms relating to the amendment to section 4 (ie, clause 2 of the Bill);

(b)an expansion of the definition of "concessionary income" under the provisions governing investment allowances ( ie, clause 9 of the Bill);

(c) thetreatment of dividends declared by and the requirement imposed on a company which is granted the investment allowance(ie, clauses 10 and 11 of the Bill).

Consequential amendments would also be made to the Income Tax Act arising from changes to the EEI Act. This is to provide for the expansion of scope of the TII to cover start-ups from all sectors and to rename the incentive as the EII.Clause 16 of the Bill amends the relevant section of the Income Tax Act to provide for these changes.

Mr Speaker, Sir, the proposed changes to the Economic Expansion Incentives Act seeks to stimulate more economic activity in Singapore. These changes reflect the Government's commitment to monitor the effectiveness of our tax incentive regime and to keep it relevant and competitive as economic conditions change.

Sir, I beg to move.

Question proposed.

Dr Ahmad Mohd Magad (Pasir Ris-Punggol): Mr Speaker, Sir, in speaking on this Bill, allow me to first declare my interest in my private capacity in being an executive of an American MNC which has

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substantiallybenefited from pioneer incentives extended by our Government.

I note with interest thatthe EEI Act has been subjected to quite regular amendments since it was first introduced in 1959. The introduction of this Act, and its regular amendments, has undoubtedly beenintegral in enabling Singapore to continually attract foreign investments, which in turn has successfully contributed toeconomic expansion over the last several decades of our existence. I commend the Ministry of Trade and Industry in continually sharpening its pencils to employ economic expansion incentives, among a host of other measures, to attract and nurture high-value adding and value-creating companies to set up base within our shores. As neighbouring and regional countries learn from our success and adopt similar incentives to attract investments, it is imperative that we, as a regional pioneer in the introduction of such incentive schemes, continue to enhance and provide new incentives to facilitate, improve and update existing incentives to continually encourage the inflow of foreign investments into our domestic economy.

Sir, allow me to now deal with some of the changes that are put forth.

First, Sir, I applaud the Minister for the extension of the tax relief period from the current 10 to 15 years for pioneer enterprises or pioneer services establishments. I believe this is probably another world first in extending pioneer incentives up to 15 years for qualifying companies. In the light of us moving more and more intovalue-creation activities, such as biomedical sciences, pharmaceuticals, involving the creation of new drugs, etc, which requires substantial upfront investments in R&D, it is certainly appropriate to extend longer tax relief periods for suchestablishments. This

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would provide the incentives for companies to invest in such value-creation activities with heavier upfront, with the comfort in mind that a quicker breakthrough would enable them to recoup their investments sooner, while also enabling them to increase their profits over a longer period of time.

In line with this, Sir, I would also like to suggest to the Minister that a similar extension to the post-pioneer period be considered so as to encourage pioneer companies to expand and upgrade their activities after their pioneer tax relief period. The post-pioneer concessionary tax of not less than 10% should remain, as such companies would have already substantiallybenefited from the zero tax extended to them during the pioneer period.

While it is desirable to continue to attract new leading-edge investments, there is also a corresponding need to further encourage companies which are already here to sink their roots in Singapore further.Sir, while the pioneer incentives have been a powerful tool to attract foreign investments, it is worthy of note that very few home-grown companies have been able to benefit from these incentives. In the light of the present strong entrepreneurship push, we should find creative ways and means to enable our local SMEs to also take advantage of this scheme. Recognising the resource constraints of local companies, one way to enable them to tap on this scheme is to encourage them to team up with smaller foreign SMEs, which may have the expert knowledge and capacity to conduct pioneering and value-creation activities here, but doing away with the hundreds of million or billion dollar investment requirement before they could qualify for long-term pioneer incentives.

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In the value-creation niche, it is not necessarily the large amount of money invested but, more often thannot, the brain power and specialised know-how that produce breakthroughs. Incentivising teaming between foreign and our local SMEs would create a win-win situation for both, particularly the latter, as the creative activities would be rooted here. Hence, I urge the Minister to also be generous in extending long-term pioneer incentives to such tie-ups.

Sir, I have a little concern in regard to the repeal and re-enactment of section 4, specifically relating to the part where the Minister is given full discretion to revoke any approval given for any pioneer industry andproduct, without the need for any public consultation. This amendment subsequently removes the obligation of posting such notices in the Government Gazette in repealing section 4. I am concerned that this amendment may go against the Government's overall drive for transparency as this amendment fundamentally precludes any right to a review of the Minister's judgment. Perhaps one consideration is to add a clause to the re-enacted section 4 which would allow a Panel to be set up and review the Minister's decision, say, within a three-month period, should any notice of objection from any party arise. This would enable the Minister to be more accountable for his decisions, consolidate cases so that explanations could be provided, while injecting a sense of transparency in the overall process.

Next, Sir, is the amendment to section 10 in clause 5. While it is laudable that amongst others, the definition of "capital expenditure" in subsection (5) is now extended to cover "expenditure concerning acquisition of Intellectual Property rights", why is it confinedonly for usage in Singapore? Since most, if not all, pioneer companies operate on a global stage, should not the IP rightsbe extended to other countries as well?

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Finally, Sir, I am also pleased that the scope of the Technopreneur Investment Incentive is amended and renamed the Enterprise Investment Incentive orthe EII to cover all forms of start-up ventures. This, hopefully, would spur and encourage more Singaporeans to consider entrepreneurship as a career option.

In connection with this, and further to the suggestion that I have made earlier, to pave the way for more local SMEs to tap into the Pioneer Incentive scheme by teaming with foreign SMEs, we should truly encourage more home-grown companies to benefit from the Pioneer Incentive scheme. Anecdotal evidence seems to suggest that most SMEs have the feeling that this particular incentive scheme is covered in a cloak of secrecy and intended only for large MNCs or foreign companies and is not within the scope of incentives that they can tap into. I know this is a misperception, but it is rather unfortunate that such a perception among our local SMEs exists.

Considering the resource constraints of our SMEs to research into such schemes, and also that the EDB which administers this scheme has only a small section on its website which describes this scheme, I would like to suggest that the Ministry consider beefing up the information about the PioneerIncentive scheme, detailing clearly how SMEs and innovative start-ups could take advantage of this scheme. To make entrepreneurship a successful career option in the long run, we must open up as many avenues as need be to create the necessary environment for entrepreneurship to thrive.

In conclusion, Sir, I would like to applaud the Ministry's effort in regularly updating thisimportant piece of legislation to maintain our competitive edge in the light ofthe rapidly changing regional and global landscape.

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I wholeheartedly support this Bill.

Dr Vivian Balakrishnan: Mr Speaker, Sir, first I would like to thank Dr Magad for the suggestions in his speech. Let me deal with them, one at a time.

The first one was on the similar extension of the tax relief period to the post-pioneer incentive. I would like to clarify that this incentive has, in fact, been replaced in 1996 by another incentive scheme which was called the Development and Expansion Incentive Scheme or DEI for short. I apologise for the frequent acronyms. The DEI offers a concessionary tax rate of not less than 5%, that is, in fact, better than the one you had recollected, and is for a period of 10 years in the first instance, and the Minister may extend the period further, not exceeding 5 years at a time, up to a total period of 20 years. I thinkhe would agree with me that a pioneer incentive period of up to 15 years plus a DEI incentive of up to 20 years is quite a significant incentive scheme when taken collectively.

The next point I want to touch on is the issue of transparency or secrecy, ashe referred to. I would like to clarify that currently the Minister can already revoke the pioneer status given to industries or products, without the need to invite the public for its views. The current legislation requires opportunities for the public to object for the inclusion of an industry or product onto the pioneer list, but not for its removal from the list. But let me address the issue in this way. These incentives schemes that the EDB works on, are really attempts to incentivise and to bring in strategic industries and companies into Singapore. Members of this House would also realise that in today's day and age, this is a very competitive field, with many countries looking to see what we are doing and, quite frankly, copying it. So there needs to be a correct balance between

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transparency of the policy, which I agree with wholeheartedly, and a certain amount of discretion with respect to the implementation of the policy. There are trade secrets and certain tactical advantages which would be ceded by being too open about the companies or the products that we are considering providing these incentives to or, indeed, are negotiating with them in order to invite them to Singapore.

So let me assure the House that we would make sure the process is adhered to, and adhered to in a proper and rigorous manner. But I also appeal for the forbearance of the House that not everything can be completely transparent in this process. But there are clear guidelines for both the award and the revocation of the pioneer status and there would be a due process of communication with the affected companies. We are proposing to remove the need for general public consultation because, as I have said earlier, we need to preservediscreetness in some parts of this process.

Let me move on to the capital and writing down allowances. In the amendment to section 10, the capital expenditure referred to in this section means those that are granted under section 19B of the Income Tax Act and this states "capital expenditure in acquiring any Intellectual Property rights for use in that trade or business". Therefore, when you read it in context, what it really means isfor the use by the company for its business in Singapore, but the actual physical exploitation of that asset may be overseas, just as,for example,ships are given capital allowances but, by definition, in the Singapore context, the ships ply outside Singapore physically.

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I move on tohis points on SMEs. Let me say first that I agree wholeheartedly withhim that our SMEs should look for opportunities to tie up with partners, both local as well as overseas, in order to reach the critical mass for them to be able to embark on projects, products and services which would be of value to Singapore at the strategic level. The Pioneer Incentive, in particular, I want to emphasise, is not limited to only foreign MNCs, but is also open to local enterprises, provided they meet the deliverables for the scheme which all applicants are uniformly subject to. On this point, I am sure Members of the House would agree with me that we should be fair to both the local SMEs as well as MNCs whom we are inviting. The criterion is the strategic value of the industry, goods or services which they are producing.

In addition to this, however, we recognise that our local SMEs may have difficulties inreaching the pioneer incentive criteria

and therefore rather than to downgrade the criteria for the Pioneer Incentive Scheme, we have provided a different set of incentives which are more appropriate to the needs of local SMEs. And examples of these include the Local Enterprise Technical Assistance Scheme and the Local Enterprise Finance Scheme, which cater specifically to local SMEs.

Dr Ahmad Magad may wish to note that in the Budget 2004, the Government gave tax exemptions for the first $100,000 taxable income for all companies less than three years old, and this will certainly cover the SMEs and start-up companies in the local context.

That being said, I do agree with Dr Ahmad Magad that we do need to raise the awareness of SMEs with respect to the pioneer incentives and indeed all the other host of incentives and support schemes which we have in place for them so that, ultimately, what we are trying to

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create in Singapore is anecosystem of big and small, foreign and local companies, who will be able to make new products, new services and be a vibrant self-sustaining economy.

Dr Ahmad Mohd Magad: Sir, a point of clarification for the Minister. In regard to the development expansion incentive, the Minister has just clarified that a company can enjoy a 20-year period of post-pioneer incentive. Is this over and above the 15 yearsof the pioneer incentive scheme?

Dr Vivian Balakrishnan: Yes.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Dr Vivian Balakrishnan].

Bill considered in Committee; reported without amendment; read a Third time and passed.